It is difficult to have a constructive discussion with the government functionaries on the state of Pak economy. Led by an over confident finance minister, nearly the entire economic leadership believes that they have done an outstanding job over the last 3 years on the economy, which is now registering itself in shape of: appreciation by most international financial institutions; healthy reserves; a stable Pak rupee; low inflation; booming stock market; and rapidly increasing revenue receipts – nay sayers like myself do not matter! Well, surely a valid viewpoint, nevertheless I must stress that the glitter that shines on the surface has little under-coat, scratch it and lies beneath the same malaise that is likely to resurface with the slightest of movement in present global dynamics. The Pakistan economy today is confronted with three main challenges and unless these are met successfully and that too fairly soon, the resultant economic implications could be quite grave.
First and foremost the mounting ‘Debt’ issue. If the present rate of borrowing is anything to go by the external debt is all set to reach a whopping $90 billion in the next 4 years. Meaning, the country will need an amount of up to $20 billion merely to service its annual debt obligations. According to State Bank of Pakistan’s figures released last week, Pakistan’s total debts and liabilities swelled to Rs22.5 trillion by last fiscal year end – a net increase of Rs2.6 trillion (or 13%) within one year. In terms of the total economy’s size, the country’s liabilities increased by 3.7% of GDP (Gross Domestic Product) to 75.9%, crossing into a danger zone of both constitutional violation and sustainability – perhaps already pointing to a debt trap. External debt (currently at Rs7.27 trillion), which grew even faster than the domestic debt, will become increasingly more difficult to service in coming months, especially as the pressure on the CAD (Current Account Deficit) mounts. Any student of economics knows that though reasonable levels of debt help finance productive investment and spur GDP growth, beyond a certain threshold the exercise turns counterproductive and even retards sustainable growth. In their famous paper on sovereign debt, Carmen Reinhart and Kenneth Rogoff (Harvard professors), argue that unproductive high borrowings invariably lead to sovereign debt defaults, counting as many as 250 in 200 years; more than 1 nation a year. Scary to even think how this may apply on Pakistan where at first glance fancy projects like Metro, Orange Line, endless motorways and flyovers with little commercial rationale seem to be the order of the day.
The second major issue that confronts us is that of declining national exports. Pakistan’s exports are nose-diving and if one couples this with the recently witnessed declining trend in foreign remittances, we have a serious problem on hand. For more than two years now total national exports have been declining at an average rate of nearly 5% per month and the main exporting sector, textiles, has registered a double-digit decline for most part of the last 12 months. While the government takes a simplistic position on this in blaming the depressed global markets, the reality is that in essence our exports are victim of our own follies, and the solutions also lie with us and not externally. To start with the government will do well by recognizing that the remedy lies in addressing the phenomenon as whole and not partially - meaning, tackling ‘competitiveness’.
To drive exports and in-turn, growth and jobs, there is a need to shore up competitiveness. However, missing have been: a) any innovative or meaningful reforms in the power sector - arguably the biggest hurdle in Pakistan’s competitiveness - and b) any real efforts to improve ease of doing business. Also, rather callous calls over the last 3 years on ‘minimum wage’, without really explaining the merits of the decisions, are proving to be a hurdle in a super competitive cost environment in South Asia. Today, India despite its stronger currency and higher per capita productivity measures at the same wage level as ours, Sri Lanka about 5% less and Bangladesh at around Rs7,000/month is half that of our current benchmark. Further, of late we have seen no efforts on harmonization of levies and standards across the country in order to cut production costs and to allow economies of scale to firms. Also, unlike our competitors, we in Pakistan have made no tangible financial allocations to support or subsidize manufacturing in areas of social & environment compliances, which as we know these days constitute a significant part of a firm’s operational cost - especially in exports. Competing nations these days, not just in South Asia but even in the West, actively subsidize such costs for their domestic industry. One such interesting example being that of the (under wraps) trade deal between USA and European Union that cleverly allows for subsidies and concessions to competing firms both by the respective US or EU governments!
Finally, the third critical problem relates to the mistake being committed by this government of indulging in excessive taxation and regulation. Much has been made of the 60% increase in tax collected over the last three years, however, it would be interesting to see how much of this came from actually broadening the tax base – Practically nil. Coercive collection drives and squeezing the existing taxpayers will only strengthen the case and charm of the ever-present un-documented sector in the Pak economy. In addition, the present aggressive oversight/regulatory drives by provincial governments and the complete disharmony between the revenue-collection authorities of the center and the provinces is resulting in added costs and double taxation for businesses. This, if not checked timely will further hurt an already compromised competitiveness level of Pak manufacturing. What is required is for the regulators to strengthen ties across the bureaucratic chain (that is with one another) and reach a consensus on major issues, especially after the eighteenth amendment and devolution of a lot of sectors/services to the provinces. Also, they need to be pragmatic enough to adapt to circumstances – thereby pre-empting problems while remaining clear about the objectives of the regulation. Clearly, provincial harmonization of ‘standards’ and ‘legislature’ are the areas where we are struggling. The job of creating smarter regulations, ones that are also aligned with the global norms, is crucial to the future of Pakistani industry and it will be foolhardy to believe that we are even anywhere near achieving the ideal mix and content of industrial regulations in Pakistan. A delay in addressing this anomaly will only result in further erosion of share of our goods in the global markets.